Monthly Archives: June 2012

The elderly are becoming victims of financial fraud and abuse in growing numbers, according to a just released online survey by Investor Protection Trust. Findings from the survey show that 84% of 762 experts who deal with investment fraud/financial exploitation of America’s senior citizens agree that the problem of swindles targeting the elderly is getting worse today.

Another key finding from the survey: Nearly all of the respondents – 99% – believe that older Americans are “very vulnerable” (75%) or “somewhat vulnerable” (24%) to financial swindles.

The survey was released in advance of a White House meeting on elder abuse scheduled for today and two days ahead of World Elder Abuse Awareness Day on Friday.

Other findings from the IPT survey include the following:

•Nearly three out of four respondents (58%) deal with elderly victims of investment fraud/financial exploitation “quite often” or “somewhat often.”  Fewer than one in 10 (7%) say they never deal with such victims.

•Nearly all of the experts (96%) say the problem of elderly investment fraud/financial exploitation in the U.S. is “very serious” (70%) or “somewhat serious” (26%).

•More than nine out 10 respondents (93%) indicate that medical professionals can play a “very” or “somewhat” important role “when they are trained to spot and report the warning signs of elderly investment fraud/financial exploitation.”

“The message from those on the front lines of investor protection is clear:  Swindles targeting older Americans are a bigger problem today than ever before,” says Don Blandin, president and CEO of Investor Protection Trust.

“Advisers have an obligation to protect senior clients from financial exploitation, according to Robert Lam, chairman of Investor Protection Institute and chairman of the Pennsylvania Securities Commission. “They have a duty and responsibility to report [abuse] to the authorities, and they have some personal liability if they don’t,” he added.

Two months ago, Merrill Lynch was ordered to pay more than $10 million by a Financial Industry Regulatory Authority (FINRA) arbitration panel to two former brokers – Tamara Smolchek and Meri Ramazio – who had sued Merrill Lynch for deferred compensation they lost after leaving for Morgan Stanley in 2008.

Following the decision, Merrill Lynch went to court to try to get the award overturned on allegations of arbitrator bias.

As reported June 7 by Reuters, the detailed arbitration ruling in the case offers insight into the way in which Merrill Lynch is fighting claims from former brokers.

“Merrill has been very aggressive and has tried to make an example of former brokers who dared to question anything ‘Mother Merrill’ has done,” said Steven Caruso of Maddox Hargett & Caruso in New York, in the Reuters article. Caruso also is chairman of a FINRA advisory group that weighs in on arbitration rules and procedures.

At issue are years of deferred compensation held in stock savings plans. Typically, that money is only paid if a broker stays at the firm for a certain number of years. But brokers also get paid if they leave for “good reason” as defined by the compensation plans. More than 3,300 brokers left Merrill Lynch after its September 2008 merger agreement with Bank of America.

After Merrill denied their deferred-pay requests, many of the brokers are pursuing claims that the merger constitutes good reason for collecting their deferred pay.

Meanwhile, Merrill says the cases are without merit.

“Financial advisors who received stock awards understood that they would forfeit any unvested stock if they decided to leave the firm,” a Merrill spokesman said in the Reuters story. “Merrill Lynch’s acquisition by Bank of America alone didn’t trigger any change to that as an acquisition by itself does not provide any basis for these type of claims.”

But FINRA’s 16-page ruling that resulted in the $10.2 million award for former Merrill Lynch brokers Smolchek and Ramazio apparently deems otherwise. Not only do arbitrators disagree with Merrill’s stance, but they also detail the firm’s treatment of its brokers and its tactics during the hearings.

Merrill “made fraudulent misrepresentations and withheld information from claimants,” the arbitration panel said in part in its decision “and used other retaliatory and coercive tactics against (brokers) to accomplish its unlawful objective” of withholding pay.

Read the complete Reuters story here.

OppenheimerFunds will pay $35 million to settle charges by the Securities and Exchange Commission (SEC) that it failed to adequately inform investors about using derivatives to add leverage to the Oppenheimer Core Bond Fund (OPIGX) and the Oppenheimer Champion Income Fund (OPCHX).  

According to the SEC’s investigation, Oppenheimer used derivative instruments known as “total return swaps” to add substantial commercial mortgage-backed securities (CMBS) exposure in a high-yield bond fund called the Oppenheimer Champion Income Fund and an intermediate-term, investment-grade fund known as the Oppenheimer Core Bond Fund.

The 2008 prospectus for the Champion Fund, however, never sufficiently revealed the fund’s practice of assuming such leverage in using derivative instruments, the SEC said in a statement. And when declines in the CMBS market triggered large cash liabilities on the total return swap contracts in both funds and forced Oppenheimer to reduce CMBS exposure, Oppenheimer disseminated misleading statements about the funds’ losses and their recovery prospects.

“Mutual fund providers have an obligation to clearly and accurately convey the strategies and risks of the products they sell,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “Candor, not wishful thinking, should drive communications with investors, particularly during times of market stress.”

The Oppenheimer Core Bond Fund lost nearly 40% in 2008, while the average intermediate-term-bond fund lost 5%. Later, the fund became the focus of several lawsuits because of its role in state Section 529 college savings plans. The suits were settled for an undisclosed amount last year.

Meanwhile, the Oppenheimer Champion Income Fund lost 78% of its value, more than 50 percentage points worse than the average high-yield-bond fund.

Elder fraud and abuse is a growing crime – and one that in recent months has garnered heightened scrutiny from securities regulators. Last week, the Financial Industry Regulatory Authority (FINRA) fined broker-dealer Brookstone Securities $1 million in connection to sales of risky tranches of collateralized mortgage obligations (CMOs) to elderly clients. The firm, its top executive and a broker also were ordered to pay $1.62 million in restitution to affected customers.

According to FINRA’s decision, Brookstone Securities made “fraudulent misrepresentation and omissions of material fact in selling complex, esoteric and risky tranches of [CMOs] to unsophisticated, elderly and retired investors.”

As part of the ruling, Brookstone’s owner, Antony Lee Turbeville, and a broker, Christopher Dean Kline, have been barred from working with a FINRA-registered broker/dealer.

In addition, Brookstone and Turbeville were jointly ordered to pay clients restitution of $440,600, while the firm and Kline were jointly ordered to pay $1,179,500.

Another Brookstone executive and minority owner, former chief compliance officer David Locy, was suspended from the securities industry for two years, barred from working as a supervisor in the future and fined $25,000.

Brookstone plans to appeal FINRA’s decision.

FINRA says that from July 2005 through July 2007, Turbeville and Kline intentionally made fraudulent misrepresentations and omissions to elderly and unsophisticated customers about the risks associated with investing in CMOs. All of the affected customers were retired investors looking for safer alternatives to equity investments.

Turbeville and Kline “preyed on their elderly customers’ greatest fears,” such as losing their assets to nursing homes and becoming destitute during their retirement and old age, in order to induce them to purchase unsuitable CMOs, FINRA said in announcing its decision against Brookstone.

By 2005, when interest rates began to rise and the negative effect of CMOs became evident to Turbeville and Kline, the men never explained the changing conditions to their customers, FINRA says. Instead, they led their clients to believe that the CMOs were “government-guaranteed bonds” and would preserve capital and generate returns of 10% to 15%.

During that two-year period, Brookstone made $492,500 in commissions on CMO bond transactions from seven customers who were named in a December 2009 complaint. Meanwhile, those same customers lost $1,620,100.

Two of Kline’s customers were elderly widows who had very limited investment knowledge. Following the death of their husbands, the women were convinced to invest their retirement savings in risky CMOs. FINRA says that Kline told the widows that they could not lose money in CMOs because they were government-guaranteed bonds, and Kline further increased their risk by trading on margin.